nep-pol New Economics Papers
on Positive Political Economics
Issue of 2006‒12‒01
eighteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Rent Seeking, Policy and Growth under Electoral Uncertainty: Theory and Evidence By Konstantinos Angelopoulos; George Economides
  2. When is Democracy an Equilibrium?: Theory and Evidence from Colombia’s La Violencia By Mario Chacón; James A. Robinson; Ragnar Torvik
  3. Resisting Economic Integration when Industry Location is Uncertain By Gallo, Fredrik
  4. Reform Redux: Measurement, Determinants and Reversals By Nauro F. Campos; Roman Horváth
  5. Committed to Deficit: The Reverse Side of Fiscal Governance By Martin Gregor
  6. The Coevolution of Economic and Political Development By Fali Huang
  7. Tolerable Intolerance: An Evolutionary Model By Martin Gregor
  8. On the Optimal Design of Disaster Insurance in a Federation By Timothy J. Goodspeed; Andrew Haughwout
  9. Why did (not) the East Extend the Franchise? Democracy, Intra-Elite Conflict and Risk Sharing By Sayantan Ghosal; Eugenio Proto
  10. Channels Through Which Income Inequality Influences Growth: Fiscal and Political Instability Approaches By Araceli Ortega Díaz
  11. Helping the meaner, hurting the nicer: The contribution versus distribution game By Staffiero, Gianandrea
  12. Why do budgets received by state prosecutors vary across districts in the United States? By Manu Raghav
  13. Why are there serial defaulters? Quasi-experimental evidence from Constitutions By Emanuel Kohlscheen
  14. The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain By Albert Solé-Ollé; Pilar Sorribas-Navarro
  15. Constitutional Commitment to Social Security and Welfare Policy By Avi Ben-Bassat; Momi Dahan
  16. Fiscal Equalization and Yardstick Competition By Christos Kotsogiannis; Robert Schwager
  17. Merged Municipalities, Higher Debt: On Free-riding and the Common Pool Problem in Politics By Jordahl, Henrik; Liang, Che-Yuan
  18. The power of peripheral governments: coping with the 1891 financial crisis in Portugal By Pedro Lains

  1. By: Konstantinos Angelopoulos; George Economides
    Abstract: We construct an otherwise standard general equilibrium model of economic growth and endogenously chosen fiscal policy, in which individuals compete with each other for extra fiscal transfers and two political parties compete with each other for staying in power. The main prediction is that relatively large public sectors in pre-election periods distort incentives by pushing individuals away from productive work to rent seeking activities. In turn, distorted incentives hurt growth. We test this prediction by using a panel data set of a group of 25 OECD countries over the period 1982-1996, as well as a cross-section of 108 industrial and developing countries over the decade 1990-2000. There is evidence that electoral and/or political instability cause relatively large public sectors, which in turn increase rent seeking (as measured by the ICRG index), and this is bad for economic growth.
    Keywords: Political uncertainty, economic growth, incentives
    JEL: D7 D9 E6
    Date: 2005–06
  2. By: Mario Chacón (Yale University); James A. Robinson (Harvard University); Ragnar Torvik (Norwegian University of Science and Technology)
    Abstract: The conventional wisdom in political science is that for a democracy to be consolidated, all groups must have a chance to attain power. If they do not then they will subvert democracy and choose to fight for power. In this paper we show that this wisdom is, if not totally incorrect, seriously incomplete. This is so because although the probability of winning an election increases with the size of a group, so does the probability of winning a fight. Thus in a situation where all groups have a high chance of winning an election, they may also have a high chance of winning a fight. Indeed, in a natural model, we show that democracy may never be consolidated in such a situation. Rather, democracy may only be stable when one group is dominant. We provide a test of a key aspect of our model using data from La Violencia, a political conflict in Colombia during the years 1946-1950 between the Liberal and Conservative parties. Consistent with our results, and contrary to the conventional wisdom, we show that fighting between the parties was more intense in municipalities where the support of the parties was more evenly balanced.
    Date: 2006–04
  3. By: Gallo, Fredrik (Department of Economics, Lund University)
    Abstract: This paper analyses the political determination of transportation costs in a new economic geography model. In a benchmark case with certainty about where agglomeration takes place, a majority of voters favour economic integration and the resulting equilibrium is an industrialised core and a de-industrialised periphery. Allowing for uncertainty, a high level of trade costs may win the election and maintain the initial distribution of industry. The reason is that a coalition of risk-averse immobile factors of production votes for the status quo due to uncertainty about which region will attract industry if economic integration is pursued. Finally, the standard view that agglomeration is unambiguously beneficial to residents in the industrial centre is challenged by introducing costs of undertaking economic integration.
    Keywords: footloose entrepreneur model; majority voting; new economic geography; regional policy
    JEL: F12 F15 R12
    Date: 2006–11–16
  4. By: Nauro F. Campos (Brunel University); Roman Horváth (Czech National Bank, Prague, Czech Republic; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We construct objective measures of privatization, internal and external liberalization reform efforts, across countries over time, and investigate their determinants, reversals and macroeconomic impacts. We find that GDP growth determines external liberalization and privatization, concentration of political power drives internal liberalization, and democracy underpins all three. We find that FDI inflows reduce the probability of privatization reversals, labour strikes increase that of internal liberalization reversals, and terms of trade shocks increase that of external liberalization reversals. We replicate previous studies and find that the macroeconomic effects of reform (when measured objectively) tend to be larger and more precisely estimated.
    Keywords: reform; liberalization; privatization; political economy; transition
    JEL: E23 D72 H26 O17
    Date: 2006–04
  5. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: Common wisdom dictates that fiscal governance (i.e. procedural fiscal rules) improves fiscal discipline. We rather find that selected fiscal constraints protect the coalitional status quo from logrolling. In effect, fiscal governance may deteriorate fiscal position. In political economy with heterogeneous agents, we examine four procedural fiscal rules: limits on amendments in legislative committees, timing of a vote on the budget size, deficit targets, and spending level targets. We find that fiscal governance protects the budgetary contract of governing coalition from attractive compromises with the opposition. When parties are evenly distributed across single policy dimension, and minimum winning connected coalitions are equiprobable, this protection is shown to magnify volatility in taxes and spending. Moreover, the volatility may increase in more fragmented party systems. We conclude fiscal governance not always and not necessarily reduces fiscal costs of fragmentation.
    Keywords: Fiscal Governance; Party Fragmentation
    JEL: D78 H61 H62
    Date: 2005
  6. By: Fali Huang
    Abstract: This paper establishes a simple model of long run economic and political development, which is driven by the inherent technical features of different factors in production, and political conflicts among factor owners on how to divide the outputs. The main capital form in economy evolves from land to physical capital and then to human capital, which enables the respective factor owners (landlords, capitalists, and workers) to gain political powers in the same sequence, shaping the political development path from monarchy to elite ruling and finally to full suffrage. When it is too costly for any group of factor owners to repress others, political compromise is reached and economic progress is not blocked; otherwise, the political conflicts may lead to economic stagnation.
    Keywords: Economic Development, Political Development, Class Structure, Land, Physical Capital, Human Capital, Monarchy, Suffrage Extension
    JEL: O10 O40 P16 N10
    Date: 2006–06
  7. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: A cornerstone of liberal-democratic regimes is the right of free speech, granted even to nonliberals who manifestly oppose it. Communism and political Islamism are two primary examples of ideologies which are tolerated in spite of calls for the limits on the right of expression. Not surprisingly, it is often argued that a tolerant society needs laws preventing non-tolerant beliefs from attacking tolerance. Yet, does intolerance necessarily prosper in a tolerant society, or is deemed to decay? To address the question, I build an evolutionary model of competing (political and/or religious) beliefs. In the model, individuals are assumed to gain from having beliefs. The gain may increase with intolerance of the belief (premium). High intolerance, however, makes strong believers fragile in a society of tolerant people. Having examined evolutionarily stable states in two specifications, I demonstrate that (for any positive premium) heterogeneity cannot prevent intolerant beliefs from spreading out. A sufficiently small increase in intolerance, when premium exceeds losses from fragility, allows intolerance to spread. Intolerance is vulnerable only as long as the premium is non-positive. This finding can also be interpreted as follows: unless fundamentalist confessions are proved to be vital for individual human existence (positive premium), a tolerant society needs no intervention to preserve tolerance.
    Keywords: Evolutionary stability; Religion; Political ideology
    JEL: A13 C79 Z10
    Date: 2005
  8. By: Timothy J. Goodspeed (Hunter College and Graduate Center of CUNY, Department of Economics, 695 Park Avenue, New York, NY 10021); Andrew Haughwout (Research and Statistics Group, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045)
    Abstract: Recent experience with disasters and terrorist attacks in the US indicates that state and local governments rely on the federal sector for support after disasters occur. But these same governments are responsible for investing in infrastructure designed to reduce vulnerability to natural and man-made hazards. This division of responsibilities – state governments providing protection from disasters and federal government providing insurance against their occurrence – leads to the tension that is at the heart of our analysis. We explore these tensions building on the model of Persson and Tabellini (1996). We show that when the federal government is committed to full insurance against disasters, states will have incentives to underinvest in costly protective measures. We then show that when the central government cannot verify state investment choices, the optimal insurance system would be designed to reward states that succeed in avoiding disasters and punish those that do not, thereby giving states an incentive to increase investment in protective infrastructure. However, this raises the question of whether the central government can credibly commit to such a scheme, and we find in a simple political model that it cannot. In our political model, the central government will decrease transfers ex-post if a state provides protective infrastructure that increases its expected uncertain income, generating a soft-budget constraint for states. This provides an additional incentive for states to underinvest in protective infrastructure. We discuss these results in light of disaster policy in the US.
    Date: 2006–11
  9. By: Sayantan Ghosal; Eugenio Proto
    Abstract: The process of enfranchisement is studied in a model of intra-elite conflict over the sharing of social surplus. The relative bargaining power of each elite, function of the surplus each elite is able to appropriate if the bargaining breaks down, is uncertain ex-ante. Accordingly, two competing elites can decide to enfranchise a weak but numerically large non-elite group in order to insure against future imbalances in relative bargaining power. The enfranchisement decision requires the non-elite group to be relatively weak and imperfectly informed about intra-elite bargaining power. Our results are robust to public good provision following enfranchisement when there is preference heterogeneity over the location of the public good across the different elites. A comparative analysis of the Indian Democracy is provided.
    Date: 2006–06
  10. By: Araceli Ortega Díaz
    Abstract: The present work encloses an analysis related to the channels through which income inequality affects economic growth and another related to the sources of economic growth. In the first, we use two-stage estimation with fixed effects finding that the fiscal effects of inequality on growth may depend on the government expenditure covariate. Secondly, we constructed a political instability index using principal components analysis, and look at its influence on income inequality and economic growth using dynamic panel data analysis for the 32 Federal Entities of Mexico. We find that political instability is bad for growth, and the fiscal effects of inequality on growth are not conclusive and need to be studied taking into account different fiscal variables.
    Keywords: Panel data models, inequality, growth
    JEL: C23 O4 O54
    Date: 2005–06
  11. By: Staffiero, Gianandrea (IESE Business School)
    Abstract: Wide experimental evidence shows that people do care about their opponents' payoff during social interaction. Our research aims to shed light on the relative importance of different motives in non-selfish choices highlighted in the recent literature. After a standard public-good game, one player is given the possibility to increase or decrease his opponent's payoff. While our baseline treatment replicates the tendency to hurt richer but lower-contributing players and help poorer but higher-contributing players, if we add exogenous assignments we find substantial willingness to hurt the rich, even if they have contributed more, and to help the poor, even if they have contributed less. These results show a greater focus on correcting inequality than on punishing or rewarding particular behavior. Moreover, we also find that subjects disregard efficiency, in terms of the overall "pie" to be shared. Overall, our data support inequality aversion as a more robust phenomenon than reciprocity and efficiency considerations.
    Keywords: Fairness; Cooperation; Inequality; Reciprocity;
    JEL: C91 D63 H41
    Date: 2006–09–24
  12. By: Manu Raghav (Indiana University Bloomington)
    Abstract: This paper analyzes how the budget allocated to state prosecutors varies from one district to another and the reasons for such variation by using theoretical and empirical methods. The main results of this paper are as follows: Other factors being equal, more politically conservative prosecutorial districts get less budget, this decrease in budget with political conservatism is steeper in more affluent and also in more populous districts, and that there are fixed costs in operating a prosecutor’s office. Other less surprising results are that other factors remaining same, prosecutorial budget increases with the population, the crime rate, and with the affluence of the district.
    Keywords: Prosecuting Attorneys, District Attorneys, State Courts, Crime, Prosecution, Litigation Process, Budget
    JEL: K40 K41 K42 H72
    Date: 2006–11
  13. By: Emanuel Kohlscheen
    Abstract: Presidential democracies were 4.9 times more likely to default on external debts between 1976 and 2000 than parliamentary democracies. This paper argues that the explanation to the pattern of serial defaults among a number of sovereign borrowers lies in their constitutions (on serial defaults see Reinhart, Rogoff and Savastano (2003) and Reinhart and Rogoff (2004)). Ceteris paribus, parliamentary democracies are less likely to default on their liabilities as the confidence requirement creates a credible link between economic policies and the political survival of the executive. This link tends to strengthen the repayment commitment when politicians are opportunistic. I show that this effect is large and statistically significant in the contemporary world even when comparison is restricted to countries that are twins in terms of colonial origin, geography and economic variables. Moreover, the result persists if Latin American and/or OECD democracies are excluded from the sample. Since the form of government of a country is typically chosen at the time of independence and highly persistent over time, constitutions can explain why debt policies in developing countries are related to individual histories.
    Date: 2006–06
  14. By: Albert Solé-Ollé (Facultat de Ciències Econòmiques, Universitat de Barcelona, Avda. Diagonal 690, torre 4, planta 2, 08034 Barcelona, Spain); Pilar Sorribas-Navarro (Facultat de Ciències Econòmiques, Universitat de Barcelona, Avda. Diagonal 690, torre 4, planta 2, 08034 Barcelona, Spain)
    Abstract: In this paper we test the hypothesis that municipalities aligned with upper-tier grantor governments (i.e., controlled by the same party) will receive more grants than those that are unaligned. We use a rich Spanish database, which provides information on grants received by nearly 900 municipalities during the period 1993-2003 from three different upper-tier governments (i.e., Central, Regional and Upper-local). Since three elections were held at each tier during this period, we have enough within-municipality variation in partisan alignment to provide differences-in-differences estimates of the effects of alignment on the amount of grants coming from each source. Moreover, the fact that a municipality may simultaneously receive grants from aligned and unaligned grantors allows us to use a triple-differences estimator, which consists of estimating the effects of changing alignment status on the change in grants coming from the aligned grantors relative to the change in grants coming from the unaligned ones. The results suggest that partisan alignment has a sizeable positive effect on the amount of grants received by municipalities. Length: 33 pages
    Keywords: grant allocation, alignment, electoral competition
    JEL: C72 D72
    Date: 2006–11
  15. By: Avi Ben-Bassat; Momi Dahan
    Abstract: In this paper we explore whether the constitutional text has any practical meaning for welfare policy. To examine the empirical importance of the constitution, we first constructed for 68 countries an index of constitutional commitment to social security in five areas: Old Age, disability and survivors (OASDI), Unemployment, Sickness, Work Injury and Income Support. We find that the extent and coverage of social security laws is not sensitive to the degree of constitutional commitment to social security.
    Keywords: Welfare Policy, Social Security, Constitution, Legal Origins
    Date: 2006–06
  16. By: Christos Kotsogiannis (Department of Economics, School of Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter EX4 4PU, England, UK); Robert Schwager (Georg-August-Universität Göttingen and Zentrum für Europäische Wirtschaftsforschung, Mannheim, Platz der Göttinger Sieben 3, D-37073 Göttingen)
    Abstract: A multi-jurisdictional system is thought to improve, through yardstick competition, accountability. At the same time equalization programs, a common feature of multijurisdictional systems, are thought to be a prerequisite for both efficiency of the internal market and the equity objective of the equal treatment of equals. This paper shows that such programs, by reducing the information context of comparisons across jurisdictions, introduce perverse fiscal incentives and thus reduce accountability. The consequence of this is that equilibrium rent-taking increases with the intensity of equalization transfers.
    Keywords: Equalization transfer programs; fiscal capacity; rent-seeking; fiscal federalism
    JEL: D72 H77
    Date: 2006–11
  17. By: Jordahl, Henrik (Research Institute of Industrial Economics); Liang, Che-Yuan (Uppsala University)
    Abstract: We use the 1952 Swedish municipal amalgamation reform to study free-riding and the common pool problem in politics. We expect municipalities that were affected by the reform to increase their debt in anticipation of a merger, and this effect to be larger if they were merged with many other populous municipalities (i.e. facing a large common pool). We use ordinary least squares and matching on the complete cross section of rural municipalities for the period 1947-1951, fixed effects when exploiting the panel features, as well as a geographical instrumental variables strategy. We find an average treatment effect close to the amount that the average merged municipality increased its debt with during this period, which corresponds to 2.8 percent of average income or 63 percent of the average increase in income. However, we do not find larger increases in municipalities that were part of a larger common pool.
    Keywords: Common Pool; Municipal Amalgamation; Local Governments
    JEL: D72 H73 H74 H77 R53
    Date: 2006–11–22
  18. By: Pedro Lains
    Abstract: In 1891 a financial crisis led Portugal to abandon the gold standard and to partially default by cutting interest payments on domestic and foreign debt. As a consequence, the country was banned from borrowing in international financial markets, until an agreement with foreign bondholders was reached in 1902. That financial crisis was the result of large current account and government deficits. Yet the abandonment of the gold standard and default were not imposed by financial difficulties only. This paper shows that such options were taken because of the growing domestic consensus regarding the need for a change in monetary policies. The concern about the domestic economy was more important to the Portuguese governments than the fear of a negative reaction of foreign bondholders. Insufficient information about the sustainability of government debt and lack of cooperation between borrowers left the Portuguese governments with space to manoeuvre according to their domestic political interests.
    Date: 2006–10

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